A Word on the Mortgage Market

The mortgage market

For those of you who are old enough to remember, the 80’s was a halcyon time for pop music, as the new romantics swept the airwaves. You’ll either agree or disagree with that, but you’ll all probably collectively agree that it has nothing to do with mortgages. But here comes the tenuous link.

Not since the 1980’s (there it is) have we seen an inverse yield curve. And, what pray tell does that mean? Good question. It means that it is cheaper to borrow long-term money than it is short-term. If we look at swap rates (those are the rates that banks lend to each other at and a key determiner in fixed rate mortgage pricing), 2-year swaps are currently at 2.34%. But 5-year swaps are some 20 basis points lower, at 2.12%.

Back in the 80’s this scenario was a precursor to a rather ugly recession, but the good news (and we all need some of that) is that today there are many factors at play that suggest this may not be the case this time around. Because we think that it’s far more likely to be a culmination of the aftereffects of Brexit and Covid and, more recently, the war in Ukraine.

As for bank rate, there is a fair bit of talk about that it will hit 2% by the end of the year. But we believe there are some valid reasons as to why this may be a bit excessive. Firstly, inflation is artificially high and will no doubt fall off in 12-18 months’ time once the demand for fuel and raw materials returns to normal levels. Secondly, higher interest rates fuel inflation, and it doesn’t need any help right now. And, finally, the age-old argument that higher interest rates stop spending doesn’t really apply today because the rise in domestic fuel prices has single-handedly done that job already.

Our technical team maintain constant contact with UK mortgage lenders and whilst some of them are ready for a bank rate of 2% at the start of 2023, in private they can’t see it going much over 1%.

The devil in the details
So, what does this all mean for mortgage borrowers? Well, firstly, let’s not forget that we remain in an ultra-low interest rate environment and that there are still plenty of excellent deals available. Lenders are constantly pulling and repricing their mortgages, but it is not just rate expectations that make that happen. They are balancing swap rates, lending volumes, margin and service levels, amongst other things.

Whilst these are all good reasons for having a broker on our side, service levels continue to be the biggest issue for all borrowers. The days when you saw a great rate, took your time to pull your application together and submitted it in safe in the knowledge that you would get that rate are gone (hopefully they will be back one day). But that’s one of our great strengths. We know the market and we know what lenders are doing. We can manage applications all the way through to completion and react accordingly if it feels like a service issue may affect your case. More than that, we may even tell you to forget about one lender because the chances of you actually completing on a loan before they pull a rate are slim to none.

Overall, our message remains one of there’s no need to panic. But always, always talk to us. If you are due to come to the end of your current deal within the next six months, then it might be time to start a conversation. There’s no getting away from the fact that rates are heading up, albeit at a slow pace. And of course, no matter where you are, if you want to talk about what this all means for you then just get in touch with your consultant, whose details you will find below.